Based on the reality of falling transaction fee income today, if we want to continue to earn a decent living from our profession, we have no choice but to add more value to the client relationship. By Kees Stoute
Wealth management professionals are in the business to help clients to ensure that their wealth helps them to (maximise the chance that they can) do what they want in life.
To be fair – and for clients this does not come as a surprise – these same practitioners also expect to be able to make a living out of this profession; preferably a good one. But how much can you reasonably expect?
Based on the developments in the past 10 to 15 years, it has become clear that salary levels increasingly depend on an ability to add true value to a relationship.
I would like to illustrate this with a simplistic example, for which I use the following assumptions:
- It is your ambition to earn a salary of USD200,000 per annum
- You bring home approximately 20% of the revenues you generate for your firm• Fifteen years ago it was possible to charge 0.5% per transaction; today the transaction fee is closer to 0.1%
- Fifteen years ago the average AUM per client was USD3 million; today it is USD4 million
- In the case of pure transaction business, it is reasonable to expect a transaction turnover of two times the value of the total AUM
- In terms of adding value, discretionary portfolio management (DPM) ranks higher than securities transaction business, as in the case of DPM, clients acknowledge that wealth management professionals have more knowledge, experience and time to responsibly manage investment portfolios and therefore entrust these professionals to manage their portfolios
- For managing a portfolio on a discretionary basis, we charge 0.75% per annum over the assets
Based on these assumptions:
- Fifteen years ago you would need USD100 million AUM (ie. approximately 33 clients) in order to be able to earn your target salary at the time – with a total transaction volume of USD200 million
- Today you need USD500 million AUM (ie. approximately 125 clients) just to match the salary you earned 15 years ago – with a total transaction volume of USD1 billion
- Today you need USD133 million in DPM (ie. approximately 33 clients) to earn your desired salary
With the current technological developments, the income per transaction continues to trend downwards. This means: more AUM, clients and transaction volume are needed just to match past revenue levels.
Some of my assumptions may be a bit rough. However, they paint a stark picture of reality (NOTE: feel free to request from me the spreadsheet I used in my calculation, so that you can draw your own conclusions.)
What does this mean?
The upshot of these figures is that low value-adding business is becoming increasingly unsustainable.
The greater your ability to win over your clients’ trust (in this example by making them feel comfortable that professionals stand a much better chance to manage an investment portfolio responsibly), the more value you will be able to add. In turn, the more realistic it becomes to expect recurring and sustainable income.
Contact Kees: [email protected]
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